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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence To Chairman Eccles prom Woodlief Thomas Date j*m«rr 7, Subject! Current Treasury financing, Mr* Rouse telephoned to report a conversation with Mr* Bartelt, who wants to send a memorandum to the Secretary regarding the current program of Treasury financing* Mr* Bartelt had figured that the Treasury will have an excess of cash receipts (including savings bond sales) over cash expenditures (excluding debt retirement) of gUli billion in January, $2.7 billion in February, and |2.7 billion in March* This will make it possible for the Treasury to retire all Federal Reserve holdings of maturing certificates and bonds, but Mr* Bartelt doubted if it would be advisable to resume retirement of any bills next week* Mr* Rouse feels, and I agree, that for psychological reasons it m m l d be well to resume the bill retirement program as early as possible* Our own figures, moreover, given in the attached memorandum, indicate that the Treasury will have adequate funds to begin next week retirement of H O O million bills a week as well as to meet other needs* Mr* Bartelt contemplates making no more calls on war loan deposits but to permit those accounts to build up for use in the second quarter to offset an excess of Treasury payments into the market at that time* We have also made the same allowance in our estimates but believe it nould be better to make a small call at the beginning of February, if necessary, but resume bill retirements, and te r /§ t i r e Federal Reserve holdings of February 1 certificates* The f±rsi question for consideration then is whether bill retirement should be resumed next week. The second question is the February 1 exchange offers Mr* Bartelt has in mind a 12-aonth, 1-1/8 per cent certificate* Presumably there is general agreement as to this proposal• W. Rouse himself raised a question as to the relation of the 1-1/8 per cent certificate rate to a discount rate of 1-l/lj. per cent* He felt it might be difficult to hold the certificate rate down to 1-1/8 per cent if the discount rate were raised* For some reason he thought that the discount rate increase should be postponed for another two weeks* He thought that the Treasury should be con^ suited and made aware of the probable difficulty in keeping to a 1-1/8 certificate rate until June* He is going to discuss the matter with Allan Sproul this afternoon* Attachment* PROSPECTIVE IONEY MMffiBT EFFECT OF TREASURY TRANSACTION IN FIRST QUfcJRT^R J9l4fi * During the f i r s t quarter of 19kB$ an excess of current cash r e c e i p t s "by the Treasury over cash expenditures (other than for debt retirement) w i l l r e s u l t i n the transfer of about 6»3 b i l l i o n d o l l a r s from the market to the Reserve Banks. In addition, i t i s estimated t h a t sales of new nonmarketable s e c u r i t i e s w i l l add about 1*5 b i l l i o n tp war loan deposit accounts at commercial banks* This t o t a l of 7*8 b i l l i o n d o l l a r s w i l l be available for retirement of maturing marketable public debt obligations* I t can be used, moreover, so as t o exert considerable pressure on the money market and make i t necessary for commercial banks t o s e l l large amounts of s e c u r i t i e s t o t h e Federal Reserve i n order to maintain reserve positions* Money-market effect»«»-The money-market effect of Treasury operations during t h i s period w i l l r e s u l t i n the f i r s t instance from the Treasury surplus of receipts a t the Federal Reserve plus any c a l l s made on war loan deposits but i n the f i n a l analysis w i l l depend upon the holdings of s e c u r i t i e s that are seleoted for retirement and t o some extent upon the timing of the retirement* The 6*3 b i l l i o n d o l l a r s of excess cash r e c e i p t s ^vill in the f i r s t instance, r e gardless Ox the retirement program, exert a drain on the reserves of those banks which experience an excess of withdrawals over r e c e i p t s of Treasury funds* The drain would be increased by c a l l s on war loan d e p o s i t s . Host banks w i l l probably be thus affected* If, however, the Treasury should r e t i r e s e c u r i t i e s held by banks or "by ncnbenk i n v e s t o r s , then t o t h a t extent bank reserves would be restored Such operations could* hypothetioally, be conducted so t h a t the net drain on bank reserves over any period of a few weekc would be r e l a t i v e l y small* To the extent that retirements a r e . l i m i t e d largely to s e c u r i t i e s held by Federal Reserve Banks, then the banks w i l l suffer a sustained loss of reserves and w i l l be under constant pressure t o maintain t h e i r reserve positions* They can do t h i s by selling s e c u r i t i e s from t h e i r p o r t f o l i o s to the Federal Reserve* Assuming t h a t debt retirement w i l l be limited as muoh as possible t o Federal Reserve holdings, the amount of drain upon the banks* reserves during the quaitor w i l l be the 6*3 b i l l i o n of net cash r e c e i p t s deposited i n Treasury balances at the Federal Reserve, plus the amount of any o a l l s made on war loan deposits, minus cash redemption of s e c u r i t i e s held outside the Federal Reserve* The announced o a l l s t o t a l i n g 683 million in the f i r s t eight days of January shoulc about equal voluntary redemptions outside the Federal Reserve during the f i r s t quarter* This prospective drain on reserves r e s u l t i n g from Treasury t r a n s actions, amounting to more than 6 b i l l i o n d o l l a r s , w i l l be p a r t l y offset by a r e t u r n flow of currency and a gold inflow, which together w i l l probably exoeed 1 b i l l i o n d o l l a r s i n the quarter* In addition banks begin the quarter with excess reserves close t o 1*5 b i l l i o n d o l l a r s , about twice as large as usual, and required reserves w i l l decline vdth the deorease i n deposits* Thus banks w i l l probably need t o s e l l y and the Roserve System w i l l need to buy, close to h b i l l i o i d o l l a r s of s e c u r i t i e s in the quarter t o maintain bank reserves* This i s an aver~ age of about 60 million d o l l a r s per working day. Debt retirement programs-Table X attached shows holdings of maturing i s s u e s , -together with past arid probable future refunding^* The System accouni ~ 2 holds about 2*9 billion dollars of issues, other than bills, maturing in the first quarter of this year* Of these holdings about 2*6 billion can be retired for cash, since about 350 million of the System1 s holdings of 750 million of the January 1 certificate issue have already bean exchanged for tha new issue* In addition, voluntary cash redemptions by other holders may amount to about 600 million* Thus, about 3*2 billion of the available funds might be used to retire maturing issues other than bills, leaving about Iu6 billion available to the Treasury to retire bills or build up cash balances* Table 2 attached presents estimates of changes in the Treasury cash balanoe by weeks for the next quarter and by months for the half year, based on the following assumptions as to debt retirement and the holding of balances? (1) All Federal Reserve holdings of maturing certificates and bonds will be retired and there will be moderate voluntary cash redemptions of these issues by other holders* (2) Bills will be retired at a rate of 100 million dollars a week beginning January 15* (This could be increased to 200 million for several weeks beginning the middle of February, without any important difference in moneyn&rket effect*) (3) There will be no calls on war loan accounts during the first quarter, except those already made for January 2 xnd 8# Vfar loan balances will increase to about 1*8 billion by March 31» and then be drawn down to about 800 million by tha end of June* (h) Treasury receipts and expenditures, together with the debt'retirement program and calls assumed, will result in an increase of tha Treasury1 s balance with the Federal Reserve to about 3*5 billion on iferoh 31 and & reduction to 1*6 by tha and of June* (These amounts would be cna&llor in c$s$ of larger bill retirements*) -3Summary figures showing the effect of the program by months are as follows: Change in Treasury deposits with F» R# Banks Amt, outstanding, end of mo. Drain on bank reserves Treasury RetireTreasury Retirement Other net oash ment of Net deposits War other than deposits Total P. R. ohange with loan balsnoe s Fed. Res. at F# R, drain held Federal balanoe (inolud- Month (exol. ret) - .3 - .9 - .1 - .3 - .5 .9 1.0 2.9 1.3 1.9 - .8 1.9 -2.0 2.5 * .9 * - .6 +1.1 2.0 - .1 +1.6 1.9 1.0 l.lj- kl - .6 - .2 - .8 6.U 5.2 h.5 -1.0 2.9 2.6 1.6 1.8 1.2 ,8 191+7: 1.1 Deo* 19ii8i Jan* Feb. liar* Apr* May June •7 - mmmm 1.0 - .3 - .3 - .2 .7 # .k ing gold held .1 2.2 2.8 - .9 - .7 - ,2 seo. Reserve (In billions of dollars) <•) - #ij. - .k 3.5 .8 h.k 3.5 Less than 50 million dollars* Debt retirement could be made more rapidf in which case there would be a smaller increase in the oash balanoe through March and a smaller decrease subsequently. An accelerated debt retirement program would not, however, add to the pressure on bank reserves. On the contrary, unless confined to the retirement of additional Treasury bills, it would greatly ease the pressure* Alsof enough should be retained in the oash balanoe to prevent it from falling below 2 billion in July or August when there will be a deficit of funds* The program as it stands will make it necessary for banks to sell large amounts of Government securities to the Federal Reserve* Even greater pressure could be exerted in the first quarter by making larger calls on war loan balances* If this were done, however. Treasury operations would result in an easing of the money market in the second quarter* la that period, Treasury oash payments other than for debt retirement will probably exceed cash receipts (inoluding war loan deposits of 1*2 billion from the sale of nonmarketable secure ities) by about 500 million, and voluntary cash redemption of securities not held by the Federal Reserve will return an additional 600 millioft to the market, The effect of these net payments to the market can be offset only by permitting war loan balances to increase as much as possible in the first quarter and drawing these balances down during the second quarter* January 5, STRICTLY DISPOSITION OF MATURED MARKETABLE TREASURY BONDS, NOTES AM) CERTIFICATES, JULY 19 1 9 ^ 7 " JUNE J O , 1 9 ^ 9 (In millions of dollars) Issue July 1, Aug. 1, Sept* 1, Sept. 15, ym <VJ 7/8* c/i 7/8* c/i T/N 19^8: Oct. 15, Nov. 1, Dec* l f Dec* 15, Jan* 1, Feb. 1, Ma** I, V&X. 1 5 , Mar* 15, Apri 1, Jun* l , June 15, July 1, July 1, July 1, Sept* }>, Sept* 1'*, Oct. \ Oct. 1 Oct, l s Dec. 15* 19U9r Jan. 1, Jem. 1, June 15, Totalss 1947 1948 * 7/8* c/i 7/* /* / 7/8* 6/1 2% T/ Held by iommercial F* R* Banks Banks 665 1,081 260 797 707 57 17 73 1+77 12 710 820 203 521 139 751 1.023 1,676 880 3UB 708 50 101 381 125 1,995 i+19 66 506 jot 1,^429 534 2,290 1,058 370 548 2,l62 928 661 165 • 66 293 ffi to Nonbank Investors* 837 903 981 270 862 2,322 180 i,oU3 1,21+8 4 357 219 753 977 1,001 658 281 '•>! 1?S T/N 1% C/I (J) S C/i (K > £ 5 2^ N 910 81 1,002 528 511 107 2,309 T/fe Aly «fcu J% Jsa» - Dec. June Dec. June 7,973 7,673 8,038 3,230 2,223 ,536 8,634 Total Outstanding 2,916 1,223 i 2,707 1,687 1,440 759 1,775 3,281 7ei 3,134 3,947 2,142 1,115) 1,223) 1,321 1,777 3,062 27i£ 1,127 2,209 3,748 451 4,092 1,554 1,467 571 3,533 M 18,830 17,721 17,761 7,138 Total Redeemed Commercial Banks* 174 97 132 128 8k 54 60 6k S 72 103 759 308 543 *l,900 * 500 * 300 * 250 * 650 * 200 2,308 43 477 55 80 101 75 110 46 65 1,038 or cash F* Ro Banks Nonbank Investors* 72 44 12 203 139 43 270 Uoo Amount Exchanged 2,742 1,127 2,209 2,580 >r 1,512 1,354 2»9ol 2,591 •2,047 •1,676 * 348 * 151 * 125 * 419 66 123 77 39 79 166 45 •1,071 •1,127 •2,962 354 916 16,524 61 *2,038 Description of new securities C/i C/i 7/1/48 1* T/N 1* C/i 10/3/48 10/1/1*8 1* C/i 1 1/8* T/N 1/8* C/I 3/8* C/i 1/8* C/I 1/8* T/N 1/8* c/i 10/1A8 / * c/i / 3/1/49 1/1/49 2/1/49* 3/1/49* Vl/49* V1A9* 6/1/49* //49 / or T/N T / I / 4 9 * 1 3/8* C/i 3,552 •Estimated 1 NOTE: Debt outstanding and Federal Reserve Bank holdings are for December JI, 19^7« Commercial bank data are from Treasury Survey of Ownership of U* S. Govern; ?.!, sepurities for which IVest date i s October 31, I9tilm Exceptions to these dates include issues prior to and subsequent to dates mentioned* OOVERNMEKT FINANCE SFCTTijU BOARD OF GOVERNORS Table 2 STRICTLY CONFIDENTIAL ESTIMATED TREASURY CASH BALANCE R&S 100-2557 January 5 , 1948 (In 1nillions of dollars) Treasury deposits with Federal Reserve Banks Treasury oash bal. 1/ Amount (end of Income fend of period) taxes period) 1Change Calls i\.©u.©inpuj .ons Total 03'. 10* 17* 24* 31* 1948 - Jan. 7 i4 21 28 4 11 18 25 3 10 17 24 31 Month ending: 1947 - Nov.* Dec* 1948 - Jan. Feb. Mar. Apr. May June 3,286 2,805 2.250 2.690 2,896 2,410 2,680 3,030 3,730 2,750 3.560 4,230 4,290 4,150 4,370 4,740 5,960 5,325 1,256 934 616 929 870 744 1,020 1,230 1,800 650 1,370 1,970 1,960 1,660 1,800 2,110 3.250 3,540 + 173 + 307 + 969 + 872 + 226 + 370 + 490 + 870 +1,180 +1,150 •1,250 +1,170 3,749 2,896 4,080 4.380 6,380 5,180 4,480 3,480 1,277 870 2,040 1,940 3,540 2,940 2,590 1,590 +1,510 +2,491 +3,500 +4,000 +5,4oo +1,750 +1,800 +3,500 + 673 + 241 • 324 + 527 + 156 — — • » - + 680 + 580 + 780 +1,800 +1,770 + 810 mm mm 451 - 99 - 350 - 2 13 — 114 -101 11 - 66 178 -101 •_ 6 - 6 — .. 2 - 2 - 543 — - 543 — —• — - 100 -100 — -- 100 -100 --1,950 -100 -1,850 30 — - 130 -100 10 mtmt - 110 -100 10 - 110 -100 - 560 -100 - 460 30 - 130 -100 10 -280 - 390 -100 - 20 - 120 -100 — - 100 -100 - — — - — — + i£3 •1,113 • 663 — — +1,000 + 750 + 400 - 726 -397 -» 650 -202 - 843 -300 -2,300 -400 -1,200 -4oo - 750 -500 - 4oo -400 -1,250 -4oo •vAotual ^ /FRASER I n c l u d i n g gold Digitized for i n General Fund balance n o t shown s e p a r a t e l y « xreas» acc*c« inter- nfctb. see* payments Notes & net pur f s of national bonds - 1947 - Dec. 3* Mar. C/Is Bills Week ending Feb. IfflCCD. : 3 - 300 - 374 - 543 -1,900 - 500 -300 - 250 — mum — - 650 -200 -155 -191 -281 -127 — — — ---— «•«• - - _ — -195 -694 — — -— — — Other Change in Redemp- Net War loan deposits5 Treasury tions of effect Change Amours; dep. with System on bank (end o f New Calls 1 F.R. Banks holdings reserves period) secur s 970 817 582 703 968 611 605 745 875 1,045 1,135 1,205 1,275 1,435 +128 -100 -100 -100 -100 - 50 -150 -150 -150 -100 -100 -100 - 50 - 50 - 298 - 433 -ljI52 - '376 - 283 - 380 - 270 - 460 - 410 - 300 - 250 - 310 - 430 - 220 - 410 -1,000 - 460 - 370 1,575 1,655 1,785 +271 +170 +150 +140 +130 +170 + 90 + 70 + 70 +160 + 80 + 60 + 80 +130 -136 -177 -400 -600 -300 -700 -800 -1,000 - 999 -2,490 -1.770 -1,200 -2,300 -1,900 -1,700 -2,650 1,423 968 985 1,385 1,785 1,185 835 835 +411 +659 +700 +400 +400 +4oo +4oo +400 -127 — - 50 1,515 + 89 + 89 +123 -673 - 241 -324 — — - 52? - 156 — ~ ••«• - - — «... — - 172 + 232 + 720 + 600 10 - 300 + 140 + 310 +1,140 + 290 230 90 90 — — 400 — 90 90 1,740 90 90 90 435 90 240 90 90. - 407 +1,170 - 100 +1,600 - 600 - 350 -1,000 320 670 2,010 855 575 360 840 + 87 -1,840 -1,910 -2,455 + + + 58 322 318 313 59 126 276 210 + 570 -1.150 + 228 - 313 + 59 - 274 - 276 - 300 - 660 - 590 - 810 - 690 80 - 135 - 230 - 550 -1,230 - 380 • U25 -1,113 -683 — — -l,C00' - 750 - 4oo GOVERNMENT FIKANCE SECTIONt BOARD OF GOVERNORS + 25 - 10 + 160
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